Sonnenfeld v. Denver

• Decision Date: 12 November 1996
• Docket Number: No. 95-1357,N,95-1357
• Citation: 100 F.3d 744
• Parties: BONNIE SONNENFELD, individually and on behalf of all those similarly situated; KARL NICOLETTI, on behalf of himself and all others similarly situated; HILDA EBLING STOLLER TRUST, by Hilda Stoller, also known as Hilda Stoller Milstein; LARRY RABINOWITZ, on behalf of himself and all others similarly situated, Plaintiffs-Appellees, v. DENVER, CITY and COUNTY OF, Defendant-Appellant, and LAZARD FRERES; PRYOR, MCCLENDON, COUNTS & COMPANY; GOLDMAN, SACHS & COMPANY; LS FINANCIAL INC.; DAIN BOSWORTH, INC.; LEHMAN BROTHERS, INC.; ARTEMIS CAPITAL GROUP, INC.; PIPER JAFFRAY, INC., Defendants. o. 95-1431
• Court: U.S. Court of Appeals — Tenth Circuit

Page 744

100 F.3d 744

BONNIE SONNENFELD, individually and on behalf of all those similarly situated; KARL NICOLETTI, on behalf of himself and all others similarly situated; HILDA EBLING STOLLER TRUST, by Hilda Stoller, also known as Hilda Stoller Milstein; LARRY RABINOWITZ, on behalf of himself and all others similarly situated, Plaintiffs-Appellees, v. DENVER, CITY and COUNTY OF, Defendant-Appellant, and LAZARD FRERES; PRYOR, MCCLENDON, COUNTS & COMPANY; GOLDMAN, SACHS & COMPANY; LS FINANCIAL INC.; DAIN BOSWORTH, INC.; LEHMAN BROTHERS, INC.; ARTEMIS CAPITAL GROUP, INC.; PIPER JAFFRAY, INC., Defendants.

No. 95-1357, No. 95-1431

United States Court of Appeals, Tenth Circuit

November 12, 1996

Appeal from United States District Court for the District of Colorado, (D.C. Nos. 95-Z-468, 95-Z-492, 95-Z-548, 95-Z-728) James M. Lyons (Frederick J. Baumann and JoAnn L. Vogt, with him on the brief), Rothgerber, Appel, Powers & Johnson, Denver, Colorado, for the appellant.

Sherrie R. Savett, Berger & Montague, P.C., Philadelphia, Pennsylvania (Genna Driscoll Kidd, Berger & Montague, P.C., Philadelphia, Pennsylvania, and Kevin J. Yourman, Wiss & Yourman, Los Angeles, California, with her on the brief), for the appellees.

Before HENRY, LOGAN, and BRISCOE, Circuit Judges.

BRISCOE, Circuit Judge.

Plaintiffs brought these four consolidated class actions alleging the City and County of Denver made false and misleading statements, in violation of Section(s) 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and Securities Exchange Commission Rule 10b-5, in the issuance of bonds to finance a new airport. Denver moved to dismiss, arguing there is no implied private right of action against municipalities under Section(s) 10(b) or Rule 10(b)-5 and that it was immune under the Eleventh Amendment. Denver appeals the district court's denial of its motion. We have jurisdiction over the securities law issue under 28 U.S.C. 1292(b). The Eleventh Amendment issue is appealable under the collateral order doctrine. See Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy, 506 U.S. 139 (1993). We affirm.

Implied Private Cause of Action

Denver contends there is no implied private cause of action against municipalities under Section(s) 10b and Rule 10b-5. We disagree.

Section 10(b) makes it unlawful for "any person" to use or employ any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security. Section 3(a)(9) (15 U.S.C. 78c(a)(9)) defines person to include a "government, or political subdivision, agency, or instrumentality of a government." Under this definition, local governments are subject to actions by the SEC to enforce Section(s) 10(b) and Rule 10b-5. See In re County of Orange, 61 S.E.C. 310, 1996 WL 34362 (1996).¹

Although Section(s) 10(b) does not provide an express private cause of action, the existence of an implied private cause of action under 10(b) and Rule 10b-5 is so well established in the courts that its existence is "beyond peradventure." Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983). See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976). The implied private cause of action was first recognized in 1946 in Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946), and by 1971, in Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13, n. 9 (1971), the Supreme Court "confirmed with virtually no discussion the overwhelming consensus of the District Courts and Courts of Appeals that such a cause of action did exist." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975).

However, it was not until 1975 that Congress added governments and political subdivisions to the definition of person in Section(s) 3(a)(9) of the 1934 Act, see Pub. L. 94-29, Section(s) 3, 89 Stat. 97 (1975), thereby clearly making it unlawful under Section(s) 10(b) for issuers of municipal bonds to use or employ any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security. Denver argues Congress did not intend to create an implied private Section(s) 10(b) cause of action against municipalities when it expressly subjected governments and political subdivisions to Section(s) 10(b).

Here, the district court followed In re Citysource Securities Litigation, 694 F. Supp. 1069, 1072-75 (S.D. N.Y. 1988), and In re Washington Public Power Supply System Securities Litigation, 623 F. Supp. 1466, 1477-80 (W.D. Wash. 1985), aff'd on other grounds 823 F.2d 1349 (9th Cir. 1987), holding that by expressly including governments and political subdivisions in the definition of person, Congress subjected municipalities to Section(s) 10(b) and the well-established private cause of action under that section. Most commentators have concluded the 1975 amendment subjects municipalities to a private cause of action under Section(s) 10(b). See, e.g., Robert W. Doty & John E. Peterson, The Federal Securities Laws and Transactions in Municipal Securities, 71 Nw. U. L. Rev. 283, 286, 294 (1976); Ann J. Gellis, Mandatory Disclosure for Municipal Securities: Issues in Implementation, 13 J. Corp. L. 65, 67 (1987); Joel Seligman, The Municipal Disclosure Debate, 9 Del. J. Corp. L. 647, 650-51 n. 14 (1984); Marc I. Steinberg, Municipal Issuer Liability Under the Federal Securities Laws, 6 J. Corp. L. 277, 279-80 (1980). But see Margaret V. Sachs, Are Local Governments Liable Under Rule 10b-5? Textualism and its Limits, 70 Wash. U. L. Q. 19 (1992); Thomas J. Schwarz, Municipal Bonds and the Securities Laws: Do Investors Have an Implied Private Remedy?, 7 Sec. Reg. L. J. 119 (1979).

We agree with the district court, Citysource, and Washington Public Power. In determining whether a private cause of action is implicit in a statute not expressly providing one, the central inquiry is whether Congress intended to create a private cause of action. Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11, 23 (1979); Touche Ross & Co. v. Redington, 442 U.S. 560, 575 (1979). Denver's reliance on Cort v. Ash, 422 U.S. 66 (1975), is misplaced. Cort's four factors have been effectively condensed into one -- whether Congress, expressly or by implication, intended to create a private cause of action. Transamerica, 444 U.S. at 15-16; Touche Ross, 442 U.S. at 575. See Thompson v. Thompson, 484 U.S. 174, 189 (1988) (Scalia, J., concurring); Schmeling v. Nordham, 97 F.3d 1336, 1343-44 (10th Cir.1996).

In determining whether a private cause of action is implicit in a federal statutory scheme when the statute by its terms is silent on that issue, the initial focus must be on the state of the law at the time the legislation was enacted -- the "contemporary legal context" existent when the new law was enacted. See Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 378. When Congress acts in a statutory context in which an implied private remedy has already been recognized by the courts, the inquiry is logically different. Congress need not have intended to create a new remedy since one already existed. The question is whether Congress intended to preserve or, in this case, to extend the pre-existing remedy. Id. at 378-79. Congress is presumed to be aware of prior judicial recognition of an implied private cause of action in a statute that does not expressly provide one. Id. at 379.

In 1975 when Congress enacted the amendment that defined person to include governments and their political subdivisions and thereby expressly brought municipalities within the scope of Section(s) 10(b), it was well established there was a private right of action under Section(s) 10(b). Moreover, until the Supreme Court decided Cort, 422 U.S. 66, on June 17, 1975, shortly after the 1975 amendment took effect on June 4, 1975, the federal courts, including the Supreme Court, readily found private causes of action implicit in statutes that did not expressly provide them, following the maxim that where there is a right, there is a remedy. See, e.g., J.I. Case Co. v. Borak, 377 U.S. 426 (1964). Cort marked the beginning of a more restrictive approach to implied private causes of action. See, e.g., Tamar Frankel, Implied Rights of Action, 67 Va. L.Rev. 553 (1981); Dennis Scholl and Ronald K. Perkowski, An Implied Right of Action Under Section 17(a): The Supreme Court Has Said "No," But Is Anybody Listening?, 36 U. Miami L. Rev. 41, 57-65 (1981); Note, Howard v. Pierce: Implied Causes of Action and the Ongoing Vitality of Cort v. Ash, 80 Nw. U. L. Rev. 722, 766, n. 7 (1985).

We conclude that in the contemporary legal context of 1975, Congress intended by its 1975 amendment to subject municipalities to the then well-established private right of action under Section(s) 10(b) when it expressly brought municipalities within the scope of that section. Given the contemporary legal context of the amendment's passage, had Congress intended there to be no private cause of action against municipalities, it expressly would have stated such an exemption.

The limited legislative history on this issue does not show that Congress intended to exempt municipalities from the private cause of action under Section(s) 10(b). The Senate report to the 1975 amendments stated:

B. Regulation of Municipal Securities Professionals-Not Issuers

The Committee is mindful of the historical relationship between the federal securities laws and issuers of municipal securities. Apart from the general antifraud provision, municipal securities are exempt from all substantive requirements. Most significantly, this means that state and local governments do not have to comply with the registration and disclosure requirements of the Securities Act of 1933. The bill does not in any way change this pattern, for the Committee is not aware of any abuses which would justify such a radical incursion on states' prerogatives.

S. Rep. No. 75, 94th Cong., 1st Sess., 1975 WL 12347 (Leg. Hist.) * 95 (1975). (...